[This
review was published in the Fall 2012 issue of The Journal of Social, Political and Economic Studies, pp.
367-375.]

Book Review

Bailout: An Inside Account of How
Washington Abandoned Main Street While Rescuing Wall Street

Neil
Barofsky

Free Press, 2012

When asked “what would you do if you
were made a dictator?,” the eminent Austrian economist Ludwig von Mises replied
“I would resign,” a response fully in keeping with his libertarian bent.We might well think that our answer would be
the same if asked that question.But
before resigning, a reluctant dictator-designate would do well to issue at
least one edict: that every intelligent member of the society read Neil Barofsky’sBailout.If there is any one book that lucidly and
engagingly tells the story of the U.S. government’s response to the recent
economic crisis and at the same time reveals the depths of American political
and financial venality, it is Bailout.

Without being a “Washington insider,” Barofsky has been ideally situated to give an inside
account of the massive bailout that began with the enactment of TARP (the
“Troubled Asset Relief Program”) in late 2008.He was named by President George W. Bush, and confirmed by the U. S.
Senate, to be the “Special Inspector General of TARP” (thus, the acronym
SIGTARP), and continued in that capacity under President Barack Obama.In all, he served as the inspector general
from December 15, 2008 to March 31, 2011.While formally on the organization chart of the U.S. Treasury Department,
Barofsky was intended to be, and was, an independent
watchdog.As the book makes clear, his
independence consisted of a tenacious refusal to be anyone’s lapdog.Before he was appointed, he was a
tough-minded prosecutor in the U.S. Attorney’s office for the Southern District
of New York, among other things going after the vicious narco-terrorist
FARC (Revolutionary Armed Forces) cartel in Colombia before proceeding to a
major accounting fraud prosecution.One
would hardly have expected President Bush, a Republican, to name Barofsky the SIGTARP, since Barofsky
is a Democrat and had just contributed to the 2008 Obama campaign.(It is worth noticing this, because the book
is nonpartisan in its scathing criticism of both administrations’ coziness with
Big Money and ham-handed administration of public business.)

Even without counting the billions in
American “stimulus” spending and voluminous “quantitative easing” by the U. S.
central bank, the “financial bailout” has indeed been massive.U.S. government commitments have amounted to
an amazing $23.7 trillion dollars
(although Barofsky is quick to explain that a
“commitment” is different from an actual pay-out, which came to what we might
call a “mere” $4.7 trillion dollars before repayments reduced the sum to $3
trillion).Certain truisms come to mind:
that programs of such size almost inherently rule out careful administration;
and that gigantic piles of cash (called “Whales” by those in the know) will
inevitably serve as powerful magnets attractingextraordinary cupidity.(Along
these lines, but citing an instance in a totally different connection, Barofsky refers to “the pervasive fraud in the Iraqi
reconstruction effort.”)When the
monetarist economist Milton Friedman was asked what he would do to stop a
depression, he joked that he would get a helicopter and simply drop cash on the
society.That pretty well characterizes
the response of the Bush/Obama administrations to the financial crisis.What Barofsky
describes is amazing – a blunderbuss approach with little supervision or caring
about supervising, and much corruption, both “legal” and illegal.

For most of us, the conundrum
throughout the crisis has been: “How can we possibly know all that has been
going on, both in detail and in broad overview?”In short compass, Barofsky’s
book supplies that need.He was
centrally situated to witness the events as they unfolded and to have the
information we all wish we had.Moreover,his independent
mentality and outspoken tenacity make him the ideal observer.A cravenly observer whose reporting was
skewed by partisan bias or who would shrink from the truth out of concern for
his career would produce a book of little value.This makes Bailout a gem much to be valued.

As it turned out, TARP and its add-ons
had many facets.Its declared purpose at
the time Congress approved it was to buy up the toxic mortgages, and the bonds
based on them, that were so befouling the balance sheets of banks and other
investors after the collapse of the housing market.Doing so would have put the U. S. Treasury
Department in a position to modify the mortgage loans, saving a great many
homeowners from foreclosure.The
Secretary of the Treasury during the final months of the Bush administration
was Henry Paulson, who, reacting to the immediacy of the financial crisis,
quite soon changed TARP’s direction, shifting it from toxic mortgage purchases
to direct injection of money into banks through the purchase of the banks’
preferred stock.This was called the
“Capital Purchase Program” (CPP).After
Barack Obama was sworn in as U.S. President on January 20, 2009, his Secretary
of the Treasury was Timothy Geithner, and Geithner renamed TARP the “Financial
Stability Plan” (FSP).He immediately
launched four new initiatives amounting to some $3 trillion (which Barofsky observes was “larger than the entire federal
budget”) .One of these, known as the
“Public-Private Investment Program” (PPIP),involved the use of money from the Treasury, the U.S. Federal Reserve,
and the FDIC (Federal Deposit Insurance Corporation) to buy up to two trillion
dollars’ worth of “legacy assets” (i.e., securities that were on the books of
banks and had lost much of their original value).This, of course, was a return to the purchase
of toxic assets.Other components of the bailout included the
pumping of money into the consumer credit market through TALF (the “Term
Asset-Backed Securities Loan Facility”).The Federal Reserve Bank of New York would “provide up to $200 billion
in cheap loans to hedge funds, financial institutions, and other qualified
investors… to buy bonds that had been generated from pools of car loans,
student loans, credit card debt, or small-business loans.”And there was the auto bailout, under which
“Treasury committed $49.5 billion of TARP funds to General Motors and $14.9
billion to Chrysler,” with the government receiving 60 percent ownership of
General Motors.In addition, there was a
mortgage-modification program known as HAMP (“Home Affordable Mortgage Plan”),
funded by $50 billion from TARP and $25 billion more from the quasi-federal
housing agencies Freddie Mac and Fannie Mae.

It is easy to get lost in all of this,
and it becomes a little confusing for a reader because Barofsky
isn’t writing a textbook explaining each program so much as he is telling a
personal narrative of his day-to-day experiences in confronting what became a
hydra-headed giant.The narrative
focuses mainly on the sorts of failings and susceptibilities to fraud that an
inspector general would be most charged with seeing.It is here that we find the reasons for the
book’s subtitle: “An Inside Account of How Washington Abandoned Main Street
While Rescuing Wall Street.”In sum, Barofsky says that “TARP was little more than a massive
transfer of wealth from taxpayers to undeserving Wall Street executives.”

Although in this review we can only
scratch the surface of the book’s content, here are some of the failings Barofsky came upon:

In the Capital Purchase Program, the
contracts that the banks had to enter into with the government “failed to
include terms that would provide incentives to increase lending,” with the
result that the banks were telling the press “they were using their
taxpayer-supplied funds for just about everything other than the increased
lending that had been Treasury’s justification for CPP.”Nor did the banks have to account for how
they used the money, with Treasury officials having what Barofsky
considered spurious reasons to justify why the banks couldn’t do so.The contracts did put some restrictions on
the banks, such as on their executive compensation, but “Treasury had neither
the manpower nor much inclination to monitor the TARP recipients’
compliance.”The banks came out
exceedingly well: they were paid 100 percent of the value of AIG’s $62 billion
obligation to them under “collateralized debt obligations” (CDOs); and Barofsky tells of “the tens of billions of dollars that
were lost by agreeing to allow the banks to keep all of AIG’s collateral.”From all this, we can see why Barofsky says the bailout of AIG was “more a bailout of the
banks than it was of AIG itself.”

When AIG (American International Group, Inc.) received
Treasury authorization to pay $168 million in “retention bonuses”to employees in its Financial Products
division (“the very unit whose reckless bets had brought down the company”),
“the TARP team didn’t seem to begrudge the AIG executives the bonuses at all”
and even “showed no shame in pushing for ever-higher salary awards.”

Barofsky
favored the auto bailout, which most Republicans opposed, but he nevertheless
became a nightmare for prevaricators about it when he revealed a deception
concerning it.“In April 2010, GM…
announced that it would soon be paying back a multibillion-dollar TARP
loan.”Barofsky,
however, testified to Congress that “GM would be paying back that loan with
other money it had received from TARP.As I explained, a good portion of the total $49.5 billion that Treasury
had provided GM had been placed in an escrow account”… and “the repayment was
being made out of that account.”Just
the same, “the payment was made the next day to loud cheers from Treasury and
the White House.Vice President Biden
cited it as a ‘huge accomplishment,’… and [Sec. of the Treasury] Geithner
issued a statement trumpeting the repayment.”The result was that this use of “spin and selective disclosure” became
“a public relations disaster that hurt the government’s credibility.”

Some of Barofsky’s
most scathing criticisms come with regard to how the home mortgage modification
program was mishandled.In late 2008,
Americans felt great urgency to rescue the economy from imminent collapse, and
one would have expected quick action.This didn’t materialize in the “stimulus” spending effort, with projects
spread over several years; and neither did it materialize in rescuing the
homeowners.Barofsky
says that “by the end of 2011, Treasury had spent only $3 billion of the $50
billion originally allocated to HAMP.In
other words, nearly three full years after HAMP was launched, home owners
across the country had benefited…” relatively little.Speaking more broadly than just about
mortgage modification, he tells us that there were “hundreds of billions of
untapped TARP funds still available in 2010.”

The HAMP program was set up with
little regard to competent administration.The mortgage modification was done through a multitude of “servicers,”
who performed “abysmally”: “they routinely ‘lost’ or misplaced borrower’s documents…
Borrowers routinely complained that they’d had to send their documents to their
servicers multiple times… but the servicers would still claim that the
documents had never been received and then foreclose.”This may well have been because the incentives
were perverse: “it could be more profitable for a servicer to drag out trial
modifications and eventually foreclose.”This was because “they earn profits from fees, particularly late
fees.”Readers will find this part of
the book especially fascinating as Barofsky goes on
to tell of other abuses, including “one particularly pernicious type,” and
illustrates the disaster by spelling out in detail the nightmare experienced by
one homeowner in California.

The public face put on this debacle by
the White House and Geithner’s Treasury Department illustrates well the
disconnect between public presentation and reality.President Obama announced that the program
would “enable as many as 3 to 4 million homeowners to modify the terms of their
mortgages to avoid foreclosure,” and the “Treasury’s website described HAMP as
‘a $75 billion loan modification program to help up to 4 million families avoid
foreclosure.’”By comparison, Barofsky reports that by the time he stepped out of the
SIGTARP position on March 31, 2012, there were “fewer than 800,000 ongoing
permanent modifications,” a number that was growing “at a glacial pace.”
Wanting to report progress, the Treasury put “pressure on the mortgage
servicers over the summer of 2009 to goose their numbers through hundreds of
thousands of unverified ‘verbal’ trial modifications.”Barofsky speaks of
a “parlor trick” when Treasury “made the absurd claim to us that the program
had never been intended to help the 3 to 4 million home owners… Instead” [we
were told] “the goal had always been to make 3 to 4 million offers for trial modifications” [his emphasis].

As this reviewer read Bailout, he found particularly
interesting the variety of sophistries that were employed to paper-over what
was being done.Here’s one: “A key
tactic is to argue that issues related to high finance are so hopelessly
complex that it is nearly impossible for mere mortals to understand the
unintended consequences of the legislation” [that was proposed to regulate the
banks].“Those arguments were advanced
when Wall Street convinced Congress to prevent derivatives from being
regulated, and they were repeated in the debates over financial regulatory
reform….”Another: It was said that the
bonuses to AIG employees were to be made because the recipients “were essential
personnel necessary to wind down AIG’s complex transactions.”Barofsky says this
explanation “didn’t quite wash” when he found out that “every single employee
at the Financial Products group seemed to have received some payment, including
$7,700 to a kitchen assistant, $700 to a file administrator, and $7,000 to a
mail room assistant.”Yet another: When Barofsky “raised concerns… that Treasury… had all but
ignored taxpayer-protecting anti-fraud provisions” in TARP, “their response was
always the same: …the big banks and the investment firms would never risk their
reputations by trying to rip off the government.”Barofsky scoffs at
this: “I always responded by noting that the events of the past two years had
proven that the banks seemed willing to put profit over just about everything,
particularly their reputations.”

The mentality that Barofsky
ran into was set by the revolving-door interchange between Wall Street (most
notably Goldman Sachs) and the government.As he dealt with the Treasury Department, “almost all of the people we
were dealing with came from the same Wall Street banks.”President George W. Bush’s Secretary of the
Treasury, Henry Paulson, had been the chief executive officer of Goldman Sachs.The first “TARP czar,” Neel Kashkari, was a former Goldman Sachs vice president.William Dudley, the acting president of the
New York Federal Reserve Bank, had been chief economist at Goldman Sachs.After Timothy Geithner became President
Obama’s Secretary of the Treasury, his chief of staff, Mark Patterson, was “a
former Goldman Sachs lobbyist.”These
are just a few examples, but they amply illustrate Barofsky’s
point that “the revolving door between Treasury and the giant investment funds
and banks just never stops spinning.”We
see the inevitable consequences in a passage where Barofsky
discusses the enormous cash bonuses paid to bank executives and speaks of “the
Wall Street fiction that certain financial executives were preternaturally
gifted supermen.”It isn’t surprising
that he discovered that “that belief system endured at Treasury across administrations” [our
emphasis].

This interplay critically damages the
performance of governmental functions.Barofsky says “regulators often lacked the political will
to successfully regulate the largest banks… Through massive campaign
contributions, relentless lobbying, and multimillion-dollar payouts awaiting
government officials who join Wall Street firms, no legislation can confer the
necessary fortitude upon the regulators.”For a society that prides itself on being a “democracy” and not a
“plutocracy,” this suggests a systemic problem thoroughly at odds with its
self-image.

It would be nice to think that “all of
this describes the situation as it has been in the past, even the recent past,
but surely the problems are being corrected and things will be better in the
future.”But Bailoutshatters this
illusion.Going into the future, things
are worse, not better.Barofsky believes there is no workable solution so long as
the financial institutions are allowed to be so large as to be dangers to the
system as a whole, relying on the government to rescue them from future
crises.Instead of cutting them down to
size,[1] what happened was that “by
encouraging the largest banks to acquire one another, they had made the
too-large-to-fail banks even bigger.”The prospect: “As long as there are financial institutions of such size
and with so many interconnections, future massive crises – and bailouts – are
all but inevitable.”Despite the
Dodd-Frank Act’s[2]
intention of instituting a comprehensive system of financial regulation, “the
executives of those institutions still enjoyed all of the short-term profits
and benefits of taking outsized risks backstopped by the government.”The credit rating agencies continue putting
their imprimatur on the system: they “continue to give the major banks higher
credit ratings based on the assumption that they will once again be bailed
out.”So far as the Dodd-Frank
regulations are concerned, “the banks have been hard at work gaming and
watering down the rules.”Here again we
see the disconnect between appearance and reality: “Even basic steps… have
lagged, with two-thirds of Dodd-Frank’s rule-making deadlines already blown by
May 1, 2012” [almost two years after the Act became law].

Bailout
is both profoundly discouraging and exhilarating.The exhilaration is that that comes from
confronting truth, and is experienced by those (such as, we might hope, the
readers of this journal) who hold truth in high esteem.The discouragement lies in the reality Barofsky has described.The crisis is not justthat of a
passing economic downturn, but of a society in which hubris and character flaws
are destroying the economic, political and social fabric.Barofsky concludes
his book with a final word:

I
now realize that the American people should
lose faith in their government.They should deplore the captured politicians
and regulators… They should be
revolted by a financial system that rewards failure and protects the fortunes
of those who drove the system to the point of collapse and will undoubtedly do
so again.They should be enraged by the broken promises to Main Street and the
unending protection of Wall Street.Because only with this appropriate and justified rage can we sow the
seeds for the types of reform that will one day break our system free from the
corrupting grasp of the megabanks.It is
my own anger that compelled me to write this book….[his emphasis]

Dwight D. Murphey

[1]A proposal, known as the Brown-Kaufman
amendment to the Dodd-Frank Act, would have “forced the handful of largest
banks to slim down to manageable levels.”But this, opposed by Secretary of the Treasury Geithner, was
defeated.Barofsky
says the result was that “Dodd-Frank gave the regulators a scalpel and directed
them to attempt to carve up the power of the largest banks through an enhanced
and mind-numbingly complex 848-page-long regulation regime.”